This article was written with the assistance of Dan McDonald. Dan is a former accounting professor at Simon Fraser University and facilitates Plan Institute’s RDSP Level 2 webinars. Thanks to Dan for his comments and assistance.
The RDSP is designed to provide a pension plan at age 60. Most beneficiaries of an RDSP will not qualify for much or any Canada Pension Plan and they will not receive the Old Age Security amount until age 65. The RDSP is the safety net to support those with disabilities experience financial security throughout the majority of their retirement years. When considering a withdrawal from an RDSP, it is therefore vitally important to review the original overall financial plan for the beneficiary. We strongly encourage everyone with an RDSP to also set up an emergency savings fund so that they are not tempted to use the RDSP funds early and risk the repayment penalties, however this is not always possible.
In this article, we’ll be covering early and other one-time withdrawals (before the end of the year in which the beneficiary turns 60), a regular withdrawal (a life-time disability assistance payment), and a withdrawal when the beneficiary has a shortened life expectancy. We will also be talking about taxation of RDSP withdrawals.
Who’s decision is it anyways?
It is the holder of the plan who makes the decisions regarding all aspects of the plan and must at all times act in the best interest of the beneficiary. In particular, this means that withdrawals must only be made and used for the benefit of the beneficiary. It is best to always consult your financial professional when contemplating withdrawals. You can also speak more about this with one of Plan Institute’s Helpline Advisors who provide free support across Canada and can start you on the right path: 1-844-311-7526 or email@example.com
Present circumstances such as the health and financial needs of the beneficiary should be reviewed routinely and may suggest that an early withdrawal is warranted. As stated previously, early withdrawals can significantly reduce the earning growth so the balance between present and long-term support must be carefully evaluated. As a general rule, consider all other possibilities before considering withdrawals before the age of 60.
Early withdrawals are ones that come from the account before the year in which the RDSP beneficiary turns 60. These withdrawals may or may not come with a penalty, and this will depend on the last date any government contributions were deposited into the account.
The RDSP was developed as a long-term savings plan which is why there are penalties for withdrawing before 60. The penalties come from what is called the 10 Year /Proportional Repayment Rule. This means that if there were any government grants or bonds deposited into the RDSP within the last 10 years, even if these were received retroactively for previous years, no withdrawals will be allowed without having to pay some of those grants and bonds back. The current penalty is $3 repaid to the government for every $1 taken out of the RDSP. The only limit to how much money you would have to repay is the *assistance holdback amount. All personal contributions and interest earned are considered the property of the beneficiary and will not need to be repaid to the government at any point.
*The assistance holdback amount is a technical term meaning the total amount of grants and bonds that are in the RDSP currently, minus any grants and bonds that had already been paid back in the previous 10 years. Note that the 10 years are calculated from the exact date that the grants and bonds were received in the RDSP.
Example: Azariah has $10,000 in their RDSP. This consists of $4,000 from personal contributions, $600 in interest earned, and $5,400 in government grants and bonds that were received in the last 10 years. Azariah would like to withdraw $1,000 of personal contributions because the vehicle that they use daily has broken down and they have no other way of paying for the repairs. Azariah will withdraw $1,000, and based on the 10 Year Rule they will need to pay back $3,000 in government contributions. Azariah’s RDSP will now consist of $6,000 – $3,000 in personal contributions, $600 in interest, and $2,400 in government contributions. If Azariah wants to withdraw the remaining $3,600 of personal contributions and interest at a later point in time, they would repay only the remaining $2,400 in government contributions because there were no other grants or bonds received in the account before making this additional withdrawal.
Depending on the age of the beneficiary, they may be able to receive the same amount or more of the lost grants and bonds into their RDSP. This will be from future grant and bond eligibility and any retroactive grants or bonds that were not paid back.
Financial institutions may also have fees for early withdrawals, and not every financial institution allows early withdrawals. This is something to consider when choosing what financial institution and professional you want to have your RDSP with.
One Time Withdrawals – Disability Assistance Payments (DAPs)
DAPs are one-time withdrawals that can be requested at any time. Early withdrawals are one form of DAPs but they are not the only form as people may request a DAP after the calendar year in which they turn 60. DAPs after this time would not be subject to the 10 Year rule because all grants and bonds received in the account would be considered the property of the beneficiary. When requesting a DAP, make sure the financial institution is clear that you are not wanting to start an LDAP.
The amount you can withdraw as a DAP after the age of 60, depends on who has put more money into the account: the government or the individual (and other personal contributions). If the RDSP has more personal contributions than government contributions, the individual can simply go to the issuer of their RDSP and request a withdrawal from their plan. In this instance, an individual could request the full value of the RDSP and closure of the plan. It is important for the holder to check with their province of residence to see if DAP payments from an RDSP are taken into consideration when calculating any provincial benefits they are receiving. The holder would also want to confirm that all assets within the RDSP are considered exempt income even while within the plan – this is because there are still some provincial or territorial programs that do not consider the RDSP exempt.
If the RDSP has more government than personal contributions, this type of withdrawal is not allowed. In very specific circumstances of severe financial hardship, there is the possibility to request an exception to this rule – to do so, the holder would need to put in a formal request with the issuer of the RDSP, most likely their financial institution, who would then submit that to the Registered Plans Directorate of the Canada Revenue Agency. For more advice on this, please contact our helpline at 1-844-311-7526 or firstname.lastname@example.org
The Pension – Lifetime Disability Assistance Payments (LDAPs)
The LDAP is a series of recurring withdrawals from an RDSP to the beneficiary when they reach 60 until the year in which they turn 83. Payments are intended to act like a pension. In certain circumstances, an LDAP may be requested before the end of the year in which the beneficiary turns 60 although to do so one must think about the possible tax and investment consequences of doing so. All financial institutions offer the LDAP as this is the most common form of withdrawal from an RDSP and meets the goal of providing an income in retirement. LDAPs require at least one withdrawal each year and the amount will differ every year depending on the investments in the RDSP during this time.
LDAPs are first calculated by taking the total value of the RDSP at the end of the previous year. The next step is to see how many years the beneficiary has left until the calendar year in which they turn 83. The total value of the RDSP will be divided by the number of years left until the beneficiary turns 83 and that will be the annual payment. Your financial institution may offer these payments monthly or once/year so it would be good to check in with them and determine what their options are so you can prepare accordingly. Note that the beneficiary must have other financial means set up for after age 83 when the RDSP funds are no longer in existence. Some examples of this would be having the beneficiary access (or continue accessing) income assistance and having a trust set up for the beneficiary.
Your financial institution should be able to offer you an estimate of how much money the beneficiary can expect to receive as an LDAP per year. If they are unable to do so or you are self-directing your account, we encourage you to take advantage of our RDSP calculator to see what you could expect to see in regular withdrawals: https://www.rdsp.com/calculator/
Three additional considerations:
- If the government contributions are more than the personal contributions, there is no possible way to stop the LDAPs or change the formula for these withdrawals. However, if there are more personal contributions than government contributions, even by $1, then the beneficiary may take larger withdrawals than the formula but still must take the minimum.
- A beneficiary may take an additional 10% withdrawal of the total amount in the RDSP at the previous year. This is only allowed if the 10% withdrawal will be more than the LDAP formula allowed for the year and keeps enough funds in the RDSP to equal more than the amount the government has contributed. This may not be applicable if the LDAP formula has been requested to start early.
- Shortened life expectancy leads to more flexibility; see later section on this topic.
Shortened Life Expectancy
The normal rules on withdrawals are relaxed if a medical doctor or nurse practitioner attests in writing that the life expectancy of the beneficiary is five years or less. The holder has an opportunity to make an election to convert the RDSP to a Specified Disability Savings Plan (SDSP). Once the plan is designated as an SDSP, no more contributions from any source (including grants and bonds) are allowed into the RDSP except for rollovers from an RRIF or RRSP.
Even with this designation, only $10,000 per year is allowed to be withdrawn from the plan without triggering the repayment rule. The SDSP will continue until the beneficiary dies or the holder decides to reverse the designation and return the plan to a regular RDSP. There is no consequence for the beneficiary living past the five years.
The rules in this area are complex so any decision must be made carefully after reference to the links in the references below. Work closely with your financial institution, pay particular attention to the forms required at any election, and keep a copy of all the required forms. For more information on this, please call our Helpline at 1-844-311-7526 or contact Employment and Social Development Canada at 1-866-204-0357 or 1-866-754-2674. More information can also be found on the ESDC website.
Taxation of Withdrawals
An RDSP will generally consist of the following: personal contributions, interest earned in the account, government contributions, and any proceeds from a rolled over amount (e.g. from an RESP). When a withdrawal is made, everything but the personal contributions will be taxed. Personal contributions are tax-exempt because they have already been subject to tax. All other amounts have never been taxed and so are taxed once they are withdrawn..
The RDSP issuer, aka your financial institution, will automatically make a withholding for tax before issuing the payment. This is not the same as paying the tax. Instead, the financial institution will report both the gross taxable amount and the withholdings to the Canada Revenue Agency (CRA) and to the beneficiary through a tax form. Note also that if the holder is not the beneficiary they may not receive the tax form. One way to avoid this is for the holder to have authorized access to the account of the beneficiary at the CRA.
If the taxable amount withheld was too high, the beneficiary will receive the over-taxed amount back after filing that year’s income tax return. If the holder wishes to get an idea of what the taxable portion would be before making a withdrawal, they could either call Employment and Social Development Canada on 1-866-204-0357 or 1-866-754-2674 (this will be accurate only if the issuer has been reporting the earnings), or they could call their issuer. ESDC will immediately understand what a “taxable amount” means, but the issuer might not. Another way of phrasing it would be to ask for the total of bond, grant and earnings in the RDSP (the fair market value of the RDSP minus the total personal contributions).
If you are wanting to learn more about any of these topics and how it might apply to your situation, we encourage you to reach out to our Helpline now to be connected with somebody for one-on-one support with your questions. You can reach our Helpline at 1-844-311-7526 and email@example.com.
Two links related to shortened life expectancy.
Note that this reference is particularly complex, is written specifically for financial institutions, and has a quiz section to check for understanding.
For the Withdrawal rules and amounts